EVALUATION OF FORWARD SALES AND OPTIONS CREATED THROUGH NATURAL-GAS STORAGE

As the North American natural gas market becomes further integrated, C anadian natural gas will increasingly be sold under contracts with ind exed, as opposed to fixed, prices. Analytical methods used in other co mmodity exchange markets will become useful in quantifying and managin g price risk, but will require some adaptation to handle the specific transportation and marketing environment of natural gas. Seasonality o f demand, and the related transportation constraints, along with the p rice and availability of gas storage services, will likely have some u nique implications for an integrated continental market in natural gas . In such an environment, there may be occasional opportunities for pr oducers and marketers to use gas storage and financial market instrume nts in price risk management or arbitrage this paper, we will examine expected returns from a natural gas storage/withdrawal scheme and the implications of market volatility, price of risk, the local cost of st orage, and observations regarding the convenience yield (a difference between the current spot market price and futures market price for fut ure periods). This work will include analysis of gas storage proposals of specific duration as well as evaluation of potential put options c reated when the storage duration is not fixed.